By CentralBankNews.info
Indonesia’s central bank cut its benchmark 7-day reversed repurchase rate (RR) by 25 basis points to 4.50 percent, noting that economic growth was lower than expected in the second quarter and a lowering of interest rates was consistent with inflation seen within its target range over the next two years while the current account deficit was within “safe limits.”
It is Bank Indonesia’s (BI) first rate cut since since October 2016. From January through June last year BI lowered its previous benchmark rate four times by a total of 100 basis points and then cut the current RR rate by a total of 50 basis points in August and October 2016.
The rate cut surprised most economists, who expected BI to continue to maintain its rate despite a hint by Governor Agus Martowardojo last week that he favored a rate cut if data supported it.
In addition to lower than expected growth, BI said external risks from the U.S. Federal Reserve’s plan to raise rates and normalize its balance sheet had eased so its own interest rates remained attractive and lower rates should help support higher economic growth.
Indonesia’s economy grew by a lower-than-expected 4.0 percent in the second quarter, the first quarterly expansion since the third quarter of last year, for annual growth of 5.01 percent, unchanged from the first quarter and below forecasts of 5.10 percent growth and second quarter 2016 growth of 5.18 percent.
While growth was supported by rising investment from faster government spending on infrastructure, BI said household consumption contracted in the second quarter and exports slowed due to lower growth in the export volume of manufactured products.
But BI confirmed its 2017 forecast for growth of between 5.0 and 5.4 percent, up from 5.02 percent last year, while the government is targeting growth of 5.2 percent.
For 2018 BI said it expects growth to accelerate to 5.1-5.5 percent on the back of rising investment and consumption from more expansive government spending and as monetary easing continues.
Indonesia’s current account deficit rose to US$4.962 billion in the second quarter of 2017 from $2.363 billion in the first quarter but was down from the second quarter of 2016’s deficit of $4.974 billion.
But BI said a large capital and financial account surplus of US$5.9 billion was financing the current account deficit, which amounted to 1.96 percent of Gross Domestic Product in the second quarter and is expected to remain in a range of 1.5-2.0 percent of GDP this year and 2.0-2.5 percent in 2018, below the safe limit of 3.0% of GDP.
Indonesia’s foreign exchange reserves end-July were US$127.8 billion, for 9 months of imports.
Indonesia’s headline inflation rate declined to 3.88 percent in July from a 2017-high of 4.37 percent in June as the rise in raw food prices slowed while the rupiah has been relatively stable since late last year and was trading at 13,348 to the U.S. dollar after the rate cut, up 1.13 percent this year.
BI said the stable rupiah exchange rate was supported by continued confidence in the country’s macroeconomic stability and the exchange rate is expected to remain stable, supported by its balance of payments and a deepening of its domestic foreign exchange market.
